Economists think London's property bubble will finally burst in 2017

LONDON — After decades of runaway growth, 2017 could be the year
the capital's property boom finally grinds to a halt.

That's according to a Times survey of leading economists
released on Wednesday. Twenty-two from 39 economists surveyed
predicted that London house prices would either flatline or drop
in 2017.

At the more extreme end of the predictions, DeAnne Julius, a
former member of the Bank of England's monetary policy committee,
and Charles Dumas, chairman of Lombard Street Research, said
prices could fall by as much as 10% next year.

A growing consensus

The survey forms part of
a growing consensus that one of the greatest asset run-ups in
British history is over — a boom which saw
average house prices in the capital grow from £257,000 in
2006 to £474,000 in 2016.

So what's happening?

1. An inflated housing market

Halifax, Britain's biggest mortgage lender, warned that price
falls are an inevitable consequence of an inflated housing
market. "House prices in relation to average earnings are at an
historical high in the capital; at nine times annual average
earnings," said Halifax's housing economist Martin Ellis in an
emailed statement.

"Additionally, mortgage affordability in London is worse than its
long run average ... price growth will slow more sharply in
London than elsewhere during 2017. There is a risk of some price
falls in parts of London, particularly in the most expensive
central locations, in 2017," he added.

Political uncertainty will be a dominant theme of 2017.
Knight Frank said: "Political uncertainty is unlikely to
subside in the early part of next year as the UK triggers the
process to leave the European Union, Donald Trump potentially
charts a new economic course in the US and ahead of elections in
several European countries."

The UK's vote to leave the European Union in June is weighing
particularly heavily on London's housing market. Market analysts
Hometrack say that concerns over the financial impact of Brexit
will "weigh
on the housing market sentiment, particularly in southern
England." The importance of the financial services sector to
London's economy makes it particularly vulnerable.

A report from estate agents Portico earlier in December
identified another warning trend. It found that transaction
volumes in London — the number of houses being bought and sold —
was "critically low," and in some areas 50% below than the
previous year.

Volume decline often indicates price decline. Take a look at this
chart:

Portico

It shows that volume decline preceded price decline at the
beginning of 2008, when a recession hit the UK. Volume recovery
preceded price recovery the following year.

Portico said the London property market has "clearly" started
reacting to the drop in volumes already, and forecasted a 6-7%
decrease in prime central London prices next year. It also
expected the price slump to "filter out" to greater London.

4. Buyers are looking elsewhere

Research from estate agents Hamptons found that Housebuyers in
the capital are fleeing at the fastest rate for 10 years, with
77,500 Londoners buying houses outside the city in 2016 — 22%
more than in 2015. That demonstrates an increased willingness to
purchase property in London's "commuter belt," which may be
contributing to a slowdown in demand in central London.

When supply grows faster than sales, slower house price growth is
a natural market response. Take a look at this chart from
Hometrack:

Hometrack

In Birmingham and Manchester, where house prices are set to grow
faster, supply is not keeping pace with sales. In London, buyers
aren't snapping up houses at the same rate they're being sold,
meaning a stall in prices is more or less inevitable.